Ford's Approaching a Huge Milestone

Another bold debt-reduction move from Ford (NYSE: F) earlier this week: The Dearborn automaker announced that it had taken another hearty chunk -- nearly $2 billion worth -- out of its rapidly shrinking debt pile.

This latest move lowered Ford's annual interest expenses by about $180 million and brought the company one step closer to a long-sought goal: a return to an investment-grade credit rating.

So here's the question: Is it time to stop worrying about Ford's debt?

A lot of progress in a short timeThis latest milestone was the result of debt-for-stock conversion offers that the company launched last month and enticed convertible-bond holders to exchange over $1.9 billion of bonds for 274 million new shares of stock and about $534 million in cash inducements. The company said in a statement that it will book a $960 million fourth-quarter charge for the exercise.

This move brings Ford's "automotive debt" (the company's term for the debt that matters -- i.e., connected to its carmaking operations, not debt carried by its financial-services unit) down to about $20.9 billion, its lowest level in a long time. That's a $12.8 billion reduction so far this year, representing an annual savings of about $1 billion in interest costs.

A billion dollars is a lot of money, even for a major auto company. It's enough to develop a major new model from scratch, or significantly refresh a few existing ones, or upgrade several factories, or fund a huge global marketing program. An additional $1 billion a year could give Ford's already very competitive product program a significant nudge forward.

But whether the company spends it on product or marketing or something else, Ford was doing pretty well on all of those fronts already. This can only improve the company's ability to execute around the world. You think General Motors (NYSE: GM) or Toyota (NYSE: TM) is happy with this news?

How about that credit rating?Ford's $20.9 billion debt load is now only slightly higher than its cash hoard, which is estimated at $19.8 billion. Just a few months ago, CFO Lewis Booth predicted that cash would exceed debt by the end of 2011, a prediction that was widely received as surprising good news. Could the company really have made that much progress that quickly? Apparently so: Booth and CEO Alan Mulally subsequently revised that prediction, saying in October that Ford would reach the cash-exceeds-debt milestone by the end of this year. It's looking awfully likely: The $1 billion dividend due from Ford's finance arm before the end of the year will nearly close the gap by itself.

That's huge. Ford famously mortgaged everything it could in 2006, borrowing $23 billion in a last-gasp effort to survive long enough for its all-or-nothing turnaround plan to get traction. That drove the company's credit rating deep into junk-bond territory, but the success of the turnaround has already brought several upgrades, including a two-level boost from Moody's in October.

Now, some analysts are saying that Ford could reach investment-grade status by the middle of next year. That would be a big deal, not only as an immensely satisfying turnaround milestone, but also because it would lower Ford's ongoing borrowing costs still further, allowing it to further upgrade its product lines and accelerate its global expansion in markets such as China -- where Ford just announced the opening of 66 additional dealerships in the next month or so -- and India.

The upshotAlthough Ford chose to broadcast its debt reduction on the eve of a holiday weekend, this latest move is big news for shareholders. Ford's already on a tremendous roll, with its financial position improving as its product push is bearing impressive fruit, and these moves to reduce the cost of the company's debt load can only improve its position.

More to the point, Ford's debt load has been a point of concern for investors even while the company's recovery has been so impressive. As that debt load shrinks, and Ford's credit rating continues to improve, that concern will continue to fade -- and that seems likely to bode well for the stock price.

Want to read more about Ford? Add it to My Watchlist, which will find all of our Foolish analysis on the Dearborn dynamo.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

@Mike - they have done something about the Ranger. It's called the F-150.

We bought Ford in May 2009 for around $5.50 a share, and we're not going to sell any time soon. I'm waiting for a return of the dividend, which is going to generate a steroid-fueled yield on our initial investment.

But I'm not as optimistic about the share price in the short term. The run up in the last two months bothers me. Ford is up 60% for the year and two-thirds of that has happened in the last eight weeks. There hasn't been any breakthrough news (or rumors) to drive that run up. The last couple of months have actually been below-average compared to the first nine months of the year. I don't understand why the price has gone up this much this quickly, and that always concerns me.

The other thing is GM. If you compare the valuations and the performance, either Ford is overpriced right now or GM is underpriced. GM has it's challenges, but a year from now they're likely going to be significantly more profitable than Ford and they'll be selling more cars. I think there's a strong, rational argument to be made that both are significantly undervalued compared to TM, HMC and DAI, but betting on the market to act rationally is on par with buying lottery tickets. I'm afraid there's a better chance that the market will compare Ford's debt-reducing quarterly results against GM's debt-free performance and will punish Ford. By this time next year GM's lack of new models is going to be a real problem and I expect Ford to make its strongest moves, but the first two or three quarters of 2011 could be rough for Ford.

Last, big run ups in Ford's share price have often been followed by profit taking that wiped out most of the gains. Ford was up 42% YTD in late April, but it gave all that back over the following three months on worries of European sovereign debt crises and the threat of a double-dip recession. Neither has gone away, and now we have uncertainty about the capital gains rate after the first of the year.

"Is it time to stop worrying about Ford's Debt". Well just bless your heart. That is like asking is it time to hold your noise when it stinks outside for years. The time pasted to worry about Ford's debt the Day the CEO gave the finger to Mr. Frank. All the debt is covered so if you hold the debt you will be payed. If the company goes under you will loss your money. But it is possible Ford might go under. It is possible. War in Korea is possible. But the risk with Ford is known. And if I were a conservative investor, which I am, I'd consider Ford a speculative investment that is perhaps worth the speculation. But I've chosen not to invest more in Ford once it got past 10. I don't know if that is wish or not. But give the cost of transaction if you have just a little money to invest, I chose "C" as my speculative investment for new money. Well mainly because if you have only say less than a $1000 to invest 'C' makes better sense to me. But I do consider Ford the better investment. Except if Ford succeeds so will "C". Someone's got to provide the money to buy the cars. So considering Ford's Debt as an issue is ok if you want to educate someone on how to read debt and its relationship to stock prices. But in this case it is a neutral consideration long ago pasted.

Sending report...

Today's Market

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!